Why Businesses Need Key Person Cover to Safeguard Their Operations

Picture this: You've built your business from the ground up, and it's thriving. But what would happen if your star salesperson, technical genius, or managing director suddenly wasn't there anymore? It's an uncomfortable thought, but one that could save your business.

What is key person insurance?

Simply put, it's a safety net for your business. In the event of the death or critical illness of a key employee, it provides a sum of money to cover the lost profitability and cost of finding and training a key employee. .

Unlike regular life insurance that protects families, key person cover (also known as keyman insurance) pays out directly to your company. The business owns the policy, pays the premiums, and receives the payout when needed. Lenders often require key person insurance as collateral for business loans. 
 

What is a key person in business?

A key person or key employee is an individual whose skills, knowledge, experience, or leadership contribute to the continued financial success of the business. This could be:

• Company directors or founders
• Your top salesperson who brings in the majority of revenue
• A specialist whose technical expertise is irreplaceable
• Anyone whose absence would significantly impact your profits 99.8% of UK businesses are small to medium enterprises (SMEs), this lack of planning leaves millions of companies vulnerable when the unexpected happens.

Here’s the worrying truth: many small businesses operate without formal succession plans or business continuity strategies. When you consider that 99.8% of UK businesses are small to medium enterprises (SMEs), this lack of planning leaves millions of companies vulnerable when the unexpected happens.

Benefits of key person cover

Losing a key member of your team is difficult enough. The payout helps you navigate the challenging transition period by maintaining cash flow, covering everything from recruitment costs to temporary replacements.

Under certain conditions, your premiums may be tax-deductible when structured correctly for revenue protection purposes. Above all, knowing you're protected allows you to focus on growth rather than constantly worrying about "what if" scenarios.

Disadvantages of key person insurance

Key person insurance premiums can be relatively expensive, particularly for businesses with older or higher-risk key personnel. The cost of the premiums may strain a company's budget, especially for startups and small businesses.

If your key person decides to leave, there is no payout from the insurance company. In these circumstances, you will have been paying high premiums for nothing. Premium costs may also increase over time, and the tax position can be complex depending on how the policy is structured.

Is it worth it?

Despite these drawbacks, for most businesses, the protection far outweighs the costs. With g and almost all of them SMEs, the vulnerability is universal. Your people truly are your greatest asset – and protecting them protects everything you've worked to build.

Contact our experienced advisers today for a consultation on key person insurance tailored to your needs.